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As we predicted in 2010,a longer deflation period has started in Australia

Six years ago we wrote a paper on price
inflation and unemployment in Australia. Here, we compare our predictions
against measurements. Concluding this paper we made a projection into 2050:

“As a final
remark on the evolution inflation (DGDP) and unemployment in Australia we
present two predictions as based on the labour force projection provided by the
Productivity Commission (2005) and the coefficients in (7) and (8) estimated
for the period after 1994: a1=3.299, a2=-0.0259; b1=-2.08,
b2=0.0979. We assume that there will be no change in the definitions
of all involved macroeconomic variables through 2050 and these coefficients
will hold. Unfortunately, the accuracy
of labour force projection has a poor historical record, taking into account
the projection between 1999 and 2016. Nevertheless, it may be useful for
assessment of the long-term evolution.
Figure 15 displays both predictions, with the period before 2010
represented by actual labour force measurements since the projected ones were
not accurate.

The level of price inflation after
2015 will likely fall below zero and will remain at -1.5% per year through
2050. This lengthy period of deflation will be accompanied by an elevated rate
of unemployment approaching 9% around 2030. The evolution of both variables is
not fortunate for the Australian economy and is chiefly associated with the
population ageing. The latter suppresses demographic growth and reduces the
rate of participation in labour force. Australia will likely need a larger
international migration to overcome deflation and high unemployment. This is
the means to overcome deflation the U.S. has been using for many years, but
even with a large positive migration the Australian economy will be on the
brink of deflation during the next four decades. Without migration, Australia
will soon join Japan having the same demographic problems and price deflation
since the late 1990s.”

Here, we
update our projections with three new readings for 2010 through 2016. As we predicted,
the Australian economy is in the beginning of a long deflation period with an
elevated unemployment. The reason behind these processes is the same as in Japan – falling labor force.

Figure. Same as in the above figure borrowed from our
paper, but with updated measurements for
the period between 2010 and 2016.

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